American Petroleum Institute v. SEC: D.C. District Court Vacates SEC Rule Mandating Public Disclosure of Payments to Foreign Governments that Pertain to Natural Resources
In Am. Petroleum Inst. v. S.E.C., CIV.A. 12-1668 JDB, 2013 WL 3307114 (D.D.C. July 2, 2013), the United States District Court for the District of Columbia granted plaintiffs’ motion to vacate a Securities and Exchange Commission (“Commission”) rule requiring certain companies to publicly disclose information pertaining to payments made to foreign governments in connection with the commercial development of various natural resources.
In adopting Dodd-Frank, Congress sought to address corruption and wasteful spending in resource rich countries. 156 Cong. Rec. S3801-02, 2010 WL 1956763. To do so, the Act added Section 13(q) to the Securities Exchange Act of 1934. 15 U.S.C.A. § 78m (West). To implement the requirement, the Commission promulgated Rule 13q-1. The Rule required disclosure of natural resource related payments to foreign governments on new “Form SD.”
Plaintiffs challenged the rule, arguing among other things, that the Commission’s reading of the statute to require public disclosure of reports was erroneous and that declining to create an exemption for countries prohibiting disclosure was arbitrary and capricious.
The Commission contended that it was without discretion under the statute to reach another result. The SEC asserted that disclosure was required to be in an annual report and the report was required to be “public.” Specifically subsection (2)(A) of Section 13(q) provided that “the Commission shall issue final rules that require each resource extraction issuer to include in an annual report . . . information relating to any payment made [to a government for] the commercial development of oil, natural gas, or minerals.” Further, Section 13(q)(3) provides that “to the extent practicable, the Commission shall make available online, to the public, a compilation of the information required to be submitted under . . . paragraph (2)(A).”
The court, however, disagreed. “To state the obvious, the word ‘public’ appears nowhere in this provision. The statute speaks of ‘disclosure’ and ‘an annual report,’ not ‘public disclosure’ and not a ‘publicly filed annual report.’"
The Commission also argued that Congress intended for the information to be made public because “the Exchange Act is fundamentally a public disclosure statute,” which required public disclosure of annual reports. The court rejected this argument for three reasons. First, Section 13(q) differed from an Exchange Act provision in that it was not aimed to protect investors. Second, textual presumptions were not dispositive when a statutory provision explicitly addressed the issue. Third, provisions of the Exchange Act sometimes only required “reports” to be disclosed to the Commission. For these reasons, the court held that the fundamentals of the Exchange Act did not necessarily require public disclosure of such payment information.
The Commission’s remaining argument rested on its interpretation of the word “compilation.” The Commission contended that “compilation of the information” unambiguously meant consolidating all independent reports. However, the Supreme Court had previously established that a compilation was “something composed of materials collected and assembled from various sources or other documents” and ordinary usage of the word also illustrates that a compilation could encompass selective materials. Thus, the Commission’s argument for mandatory public disclosure of the annual report failed.
Lastly, the court found that the Commission’s denial of any exemption for countries that prohibited such disclosures was arbitrary and capricious. The Commission had declined to adopt any exemptions because doing so would be “inconsistent with Section 13(q),” and “would undermine Congress’ intent to promote international transparency efforts.” The court, however, disagreed. The Commission's view of the statute's purpose — international transparency at all costs, exemptive authority or not — thus contradicts what section 13(q) says on the very question.” With respect to other reasons for denying the exemption, the court noted that “where an agency ‘has relied on multiple rationales (and has not done so in the alternative), and [a court] conclude[s] that at least one of the rationales is deficient, [the court] will ordinarily vacate the [action] unless [it is] certain that [the agency] would have adopted it even absent the flawed rationale.’ "
Consequently, the court granted the plaintiffs’ motion for summary judgment, vacated the Rule, and remanded to the Commission for further consideration.
The primary materials for this case may be found on the DU Corporate Governance website.